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UNITED STATES v. FALINO

November 16, 1977

UNITED STATES OF AMERICA, Plaintiff,
v.
NICHOLAS FALINO, Defendant



The opinion of the court was delivered by: BARTELS

BARTELS, District Judge

 This action was brought by the United States in 1970 to collect the unpaid balance of $7,854.33 and interest (aggregating in October, 1977, a total of approximately $16,610.36) due on a tax assessment made against the defendant, Nicholas Falino, in March, 1963. The assessment was for withholding taxes which had become due between January, 1960 and March, 1961, on wages paid to the employees of Rogers & Haggerty, Inc., a general contractor, of which Falino was president.

 Although Falino was president of Rogers & Haggerty during the period for which taxes were due, he did not have control of the corporation's funds. Instead, the corporate funds became subject to the control of National Surety Corporation ("National"), the surety under a Performance and Payment Bond threatened with default, pursuant to certain agreements executed between National and Falino.

 After consideration of all the testimony and exhibits, the court has concluded that under the circumstances of National's control, Falino cannot be held liable for the assessed withholding taxes. In support of this determination, the court makes the following findings of fact and conclusions of law.

 FINDINGS OF FACT

 1. Rogers & Haggerty, Inc. ("R & H"), a New York corporation, was engaged in general construction contracting business. Defendant, Nicholas Falino, was president, treasurer, and sole stockholder of R & H during the five quarters between January 1, 1960 and March 31, 1961, for which the Government now seeks unpaid taxes. During said period, the defendant's wife, Phyllis Falino, was secretary of R & H.

 2. On February 1, 1959, R & H entered into a contract with the New York State Dormitory Authority for the construction of a dormitory at the State University Teachers College at New Paltz, New York. In order to obtain this construction contract, it was necessary for R & H to secure a surety bond guaranteeing complete performance of the contract, which it did by obtaining a Performance and Payment Bond from National on February 1, 1959.

 3. While no notice of default was received by R & H from the Dormitory Authority, the Dormitory Authority did, in August, 1959, advise National that the performance by R & H was deficient, and demanded that extensive stress tests be made upon the concrete which R & H had poured for the dormitory floors.

 4. Discussions were held between National, the Dormitory Authority, and R & H during which a compromise was reached on the extent of testing which would be necessary. In the course of these discussions, National was advised by R & H that even the agreed upon tests would cause delays and increased costs which would make it financially impossible for R & H to complete the project.

 5. National's own investigation revealed that the financial condition of R & H was such that R & H would be incapable of completing the construction project without extensive financial assistance from National. As a condition to providing such assistance, in the form of advances for wages, supplies and other expenses, National compelled R & H to grant it complete control over funds from the Dormitory Authority payable to R & H with respect to the New Paltz construction project.

 6. National's control over R & H's funds was established by agreements dated November 20 and December 2, 1959, under which all funds from the Dormitory Authority due to R & H were to be deposited in a special joint checking account at the Meadow Brook National Bank, Long Island, or were to be forwarded directly to National. Funds deposited in the special joint account could be withdrawn only through checks signed either by an officer of R & H when countersigned by a representative of National, or when signed by National alone.

 7. The special account contained funds reflecting payments by the Dormitory Authority to R & H and funds deposited by National to enable R & H to complete its performance. Moreover, the indemnity agreement, executed as consideration for the Performance Bond and signed by R & H and Falino, provided that upon default all funds due and owing to R & H from any source were automatically assigned to National. Following National's assumption of financial control over R & H, all such funds were accordingly deposited in the special joint account.

 8. At the time the special joint account with National was approved, R & H continued to maintain a separate general checking account at the Meadow Brook National Bank, the cumulative balance in which did not exceed $1,000.00, against which Falino made several small payments to himself during the period for which withholding taxes are due.

 9. Falino's salary was paid by checks drawn on the special joint account, at least forty-five of which contained the signature of Falino and a countersignature of National's representative. Five such checks were not countersigned, but were signed by Falino alone with National's prior approval. National on at least one occasion wrote to the Meadow Brook National Bank approving the payment of specified special account checks which had not been countersigned by National, but at ...


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